Why we shouldn’t rely too much on GDP and Human development index to tell us how we are doing

Up to now, I personally think we are yet to come up with a more accurate and adequate way of measuring our welfare, our quality or standard of living, that is, how happy we feel in our lives or how enjoyable and satisfying our lives are. If this is what we are measuring GDP (output) is in so many ways an inadequate measure of welfare because it is concentrating on output, it focuses more on commodities therefore GDP does not capture the happiness and joy got from family and social networks. So some economists have tried to come up with new ways to better measure GDP as a measure of our welfare, and they have broken down welfare into three things that they believe constitute welfare. Firstly, welfare has something to do with consumption of goods and services giving us utility, pleasure, or happiness. Secondly, it also has something to do with our life expectancy because obviously the longer we live, the longer we can enjoy the pleasure we get from consumption. Last but not least, as humans we have the desire to reach our potential in life, to feel that we have achieved what we are capable of achieving and so this should also be included in any measure of welfare. With this in mind, economists came up with a measure called the human development index (HDI), which includes GDP per capita (Consumption), healthcare and education. When calculating countries’ HDI, the United Nations Development Programme (UNDP) includes healthcare, and this healthcare is measured in terms of infant mortality rate (ie number of infant deaths below the age of 1 per 1000 births which translates into an infant mortality of 10%). Another measure of healthcare in the HDI is the number of doctors per 1000 people as well as the life expectancy. In terms of education measures, the HDI includes literacy rates, the average number of years of school education and for the output measures, the GDP per capita. Taking these three measurements, the HDI comes up with an index number, which is a combination of GDP per capita, healthcare measures and education measures.When the UNDP tries to compare countries as they appear in GDP ranking and HDI ranking we do see a very strong correlation between countries measured in each way. The ones that are ranked high up tend to be also high up in the HDI ranking, which tells us that they are not measuring things that are completely different, and it also tells us that despite GDP faults is not such a bad measure of welfare. However there are exceptions to this rule and China is a notable example. China is second in the ranking of GDP in the world, but not even in the first 90 countries in UNDP 2013 HDI ranking report. So we can argue that China has an economy that produces a lot of output but where the welfare of its population is relatively low compared to other countries. This shows again that there are differences in measurement between GDP and HDI within countries, and that in some cases HDI is probably a better measure of welfare than the GDP.

The HDI of these countries does not necessary equal to their GDP, infact the U.S and China were among the countries with the highest GDP but they had relatively low HDI compared to other countries.

The HDI of these countries does not necessary equal to their GDP, in fact the U.S and China were among the countries with the highest GDP but they had relatively low HDI compared to other countries.

However, HDI does not capture accurately what happens in everyday life of the population to be able to measure the people’s development. If a metaphor is used, GDP represents a house and the HDI is the door to the house. One should not mistake the door to be the house and one should not stop at the door, rather one should enter the house. According to the British Medical Journal article by Tony Delamonthe, research done in Mexico, Ghana, Sweden, the U.S. and the U.K. shows that although individuals typically get more wealthy (increase in per capita) during their lifetimes, they don’t get happier. Rather, argues Delamonthe, family, social and community networks bring joy to one’s life, and these are the things HDI can not really capture in terms of numbers. Additionally, the value of leisure has a straightforward interpretation. A worker makes a choice between working an extra hour and enjoy the utility from consumption of the goods that extra hour buys or to use that hour as leisure time which also contributes to the welfare of the worker. Therefore the value of life is more tricky to measure. Even though HDI is probably in some cases particularly in some countries a better measure of welfare and logically because it includes more than just GDP does, it still leaves important items out of the question, and this type of measurements have us fooled that the population is developed in most aspects of life when in reality it is a commodity-based interpretation of one’s quality of life.

Works cited

“Human Development Report 2014 Sustaining Human Progress: Reducing Vulnerabilities and Building Resilience” UNDP.Web. 2014 http://hdr.undp.org/sites/default/files/hdr14-report-en-1.pdf

“Dynamic spread of happiness in a large social network: longitudinal analysis over 20 years in the Framingham Heart Study” . Dr. Tony Delamonthe. The British Medical Journal (Thebmj). 05 december 2008. Web. http://www.bmj.com/content/337/bmj.a2338

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Why Information Asymmetry should be of high consideration in an economy.

Information asymmetry is a predominant issue in economics. In most sales transactions, the seller has more information than the buyer, in other words the seller has the opportunity to sell low quality faulty products for higher prices. This leads buyer to distrust seller and therefore develop a feeling of questioning products on the market.

A good way to explain this particular issue is analyzing Adverse selection, which is a market process where information asymmetry causes negative results. For example health insurance companies. Insurance companies depend on various clients, that is they need a certain number of healthy individuals to pay premiums (an amount to be paid for an insurance policy) and not use a lot of the company’s services. The premium prices of the ones who pay more than what the company spends on them, has to exceed the ones who pay less than what they insurance company to balance out. However, people who most likely buy health insurance are people who need it due to their health problems. These people are more costly to the insurance companies because they need more services than a healthy person. The insurance companies do not know every new policy applicants health status but can certainly do everything in their power to find out as much as they can, and this lack of information leads these kind of companies to raise premiums in order to reduce the risk of covering their clients’ health bills than they can afford. This increase in premiums will cause the healthiest people to cancel their insurance which will result into a further increase in premium price to balance out this new gap. Since insurance companies now have a riskier and more costly group, the companies will need more money to sustain its clients, which will lead them into another increase in premiums, and this will result into the averagely healthy people canceling their insurance as well. This vicious cycle goes on, until the only people insured by the companies are the least healthy. At this point, the premiums paid will not even begin to cover the costs of the sick. In theory, this could potentially lead to the fall of the health insurance industry, however, this is an unlikely scenario as this kind of risk is diminished by things like employer offered insurance, which makes the largest source of money for insurance companies and the people’s need to feel safe or people’s need to take precautions.

Another information asymmetry example is the “Market for Lemons”, a term originally by the economist George Akerlof. The ‘used car’ market is the classic example of quality uncertainty (lack of enough information on quality). A damaged used car is generally the result of unnoticeable actions,such as the owner’s driving style, how the car was being maintained and accidents. Because the buyer does not have this information, his/her best assumption is that the vehicle is of average quality, and therefore will pay only an average fair price. As a result, the owner of a car in great condition, will suffer from this because he/she will not be able to get a price high enough to make selling his/her car in great condition worthwhile. Therefore, the owner of good cars will not sell his/her vehicles in the used-car market because it reduces the quality of cars in the used-car market, which reduces the price buyers will pay, and also reduces the quality of cars sold and so on.

 

Works cited:

” George Akerlof.” The Market For Lemons. 1970. <http://wikisum.com/w/Akerlof:_The_market_for_lemons&gt;